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Property Talk

Property Talk

Author: Andreas Wassenaar
Date: 2018-12-14

What we can expect from housing prices next year


As we move into the final month of the year our attention naturally moves to the New Year ahead and the expectation of what may unfold in terms of market demand and property pricing. Home pricing and the measured house price indexes such as FNB's House Price Index reveal interesting aspects of housing demand and what we can expect in the year ahead.

The FNB House price index showed house prices growing at 4,2% in November 2018 up slightly from the 4,1% recorded in October 2018. The important calculation is to adjust price changes for CPI inflation to get an understanding of what real house prices are doing.

Currently our CPI inflation rate is 5,1% and real house prices are recorded as declining at -0,9% p.a. This negative growth rate in real house prices has been evident since early 2016. This is what economists have been referring to a gradual and ongoing real house price correction. This is not a bad thing. It is simply a way of how markets adjust in response to demand and supply forces.

If we take a longer view snapshot and consider real house price growth from 2001, often referred to as the "pre-boom" year, we see that the 88,9% growth to date remains relatively high.

We are down by 20,8% from the peak reached in August 2007. Had you bought a residential property during the 2006 to end 2008 period, the price growth from that point has been down and the overall market significantly below those peak levels, even more than a decade later.

This shows that timing of a purchase remains important, if your intention is to maximize your investment return. The fact is however that we buy and sell residential properties for reasons beyond that. We all need a place to live and a roof over our heads. A place to raise families and make memories.

FNB have expressed their opinion that the cumulative real decline in house prices to date may not be sufficient to bring real house prices back into line, given that we are facing weak economic fundamentals. The FNB market strength index which takes into account the measurement for market demand relative to market supply is a good tool to understand the underlying forces driving prices.

Currently market demand is marginally below market supply. 2019 is projected to be very similar to 2018 in terms of house price growth. Nominal average house prices are forecast to grow by 3,7%. CPI inflation projections are currently at 5,3%for 2019 meaning that real house prices will remain under pressure.